Iran Floats Prospect Of Opening Energy Industry To West

Kharg Island, which is home to one of Iran's most important oil fields

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Iran Floats Prospect Of Opening Energy Industry To West

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In anticipation of a thaw, Iran is preparing to capitalize on improved relations with the West.

And to win skeptics over to the idea that crippling economic sanctions targeting Iran should be dropped, Tehran is floating a huge incentive -- the prospect of giving Western investors access to the country's vast oil and gas reserves.

Western-friendly Oil Minister Bijan Zanganeh has been sending signals that the new spirit of openness being displayed by Iranian officials could extend to Iran's energy market.

In recent weeks, he has touted the competitive advantages of extracting oil and gas in Iran, and said contracts are being rewritten to allow for more foreign investment in the sector -- including to develop the massive South Pars field.

"We will do anything necessary to get back Iran's share in the oil market," Zanganeh was quoted as saying by the Iranian Oil Ministry's news agency, Shana, on October 1. "Contacts have been made [with foreign energy companies] to that effect and all of them are willing to return."

Iran appears to be exploring the idea that the lure of a more liberalized oil market and the promise of sweetened oil contracts could get the West to loosen harsh economic sanctions on the Islamic republic.

Oil Production Way Down

Iran has the world's third-largest proven oil reserves and the second-largest natural-gas reserves. But economic sanctions imposed by the United States and European Union that target Iran's oil and banking sector have squeezed the country's oil output and made it difficult for it to sell its oil on the international market.

Sanctions have also dissuaded Western companies from investing in Iran, causing oil production in the country to fall to its lowest levels in two decades. Oil exports have fallen by half from pre-sanction levels, costing Tehran billions of dollars in lost revenues annually.

Iranian-born economist Mehrdad Emadi, of the Betamatrix consultancy in London, says falling oil exports and a flagging economy have prompted a rethink in Tehran.

"Inside Iran, we see recognition that the era of top-down management of the oil industry hasn't been very fruitful and productive to the economy," Emadi says. "The recognition is that the private sector in Iran should be allowed to come in and foreign companies should be allowed to invest."

Any immediate or broad loosening of sanctions is unlikely. Western countries have said sanctions will only be scaled back if Iran takes concrete steps toward reducing uranium enrichment and shedding light on its nuclear program.

Western countries have imposed sanctions on Iran to punish it for its nuclear program, which the West believes is designed to create an atomic weapon. Iran says its program is only for peaceful purposes.

Queue Forming

Iran has an opportunity to prove that its new spirit of openness is more than just talk in meetings this week in Geneva with the P5+1 -- the United States, Britain, France, Russia, and China, plus Germany.

Major Western oil companies have been quick to show their interest in investing in Iran should sanctions be lifted.

Peter Voser, chief executive of oil and gas giant Royal Dutch Shell, said during a press conference in London on October 1 that opening up Iran's energy sector to international companies is vital to meeting the world's energy needs. "Longer term, Iran's oil and gas resources will have to be developed to meet demand," he said.

At the same press conference, Christophe de Margerie, the chief executive of the French energy giant Total, told reporters that his company was eager to return to Iran if sanctions were eased and Tehran made energy contracts more lucrative.

Zanganeh has said he has held informal talks with half a dozen foreign energy companies about resuming their activities in Iran.

Zanganeh was expected to travel to New York last month with President Hassan Rohani for the United Nations General Assembly, which could have put him in contact with the heads of U.S. and European oil firms. He canceled his travel plans at the last minute, however.

Emali expects major Western energy companies to return to Iran eventually. He says declining oil output in the Middle East, the discovery of massive new oil fields in Iran, and the possibility of eased sanctions makes Iran an attractive market.

"These [new discoveries] promise to make Iran incredibly profitable for any foreign partner that is willing to take the initial risk and enter the market," Emadi says. "Sanctions are going to be softening, at least, in the next 12 to 18 months and, if that's the case, there is very serious advantage to be an early entrant into the Iranian oil market."

Bitter Memories On Both Sides

Central to Zanganeh's apparent attempt to lure foreign energy companies to return to Iran is to reform the country's so-called "buy-back" contracts.

Under those contracts, investors are paid in oil and gas from projects they develop with their own money, but then they have to hand the project back to Iranian state companies when finished and wait to be paid.

The issue of foreign ownership of oil and gas fields in Iran is a contentious one, a legacy of political turmoil in Iran in the 1950s and vivid memories of the days when the country's oil industry was controlled by Western energy companies.

After the Islamic revolution in 1979, Iran nationalized its energy sector and kicked many Western companies out. U.S. oil firms have been barred by Washington from working in Iran for the past two decades.

Djamchid Assadi, an Iranian economist at ESC Groupe Business School in Dijon, France, says any move by Tehran to liberalize the energy sector and invite Western companies to return would likely be met with stiff opposition from Iran's hard-line conservatives.

"Hard-liners still hold the power. They accept foreign investment in some cases if they have rights in it and if they can get benefits from it," Assadi says. "They want to make sure they keep their privileges so they can receive money from any contracts with foreigners."